deflation

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Prepare For The Great Global Contraction

How hard will we hit the ground?
Friday, May 19, 2017, 8:01 PM

Executive Summary

  • The repercussions of the Fed's Free Money Machine
  • Why debt-funded state control stagnates productivity
  • The importance of the 8-year cycle
  • What should guide investors' focus and decisions

If you have not yet read Part 1: How Long Can The Great Global Reflation Continue? available free to all readers, please click here to read it first.

In Part 1, we asked these questions: can we just keep doubling and tripling the economy’s debt load every few years? What if household incomes continue declining? Are these trends sustainable?

In the near-term, we asked: is this Great Reflation running out of steam, or is it poised for yet another leg higher? Which is more likely?

Let’s start by looking at the mechanism that funds the government’s deficit spending, i.e. its ability to borrow and spend enormous sums of money year after year.

The Free Money Machine

The state can afford to continue or increase fiscal stimulus (deficit spending) because the central bank (the Federal Reserve) has created what amounts to a free money machine. Here’s how the machine works.

The federal government issues $1 trillion in new bonds to fund another $1 trillion in deficit spending. The central bank (Federal Reserve) creates $1 trillion with a few keystrokes, and buys the $1 trillion in bonds with newly created money.

The Federal Reserve earns interest on the $1 trillion in bonds it now owns, but it returns this income to the Treasury, minus the Federal Reserve’s relatively modest expenses of operation. Let’s say the bonds carry an interest rate of 2.5%.  The government pays the Federal Reserve $25 billion in annual interest, and the Federal Reserve returns $20 billion annually, so the net cost of borrowing and spending $1 trillion is an insignificant $5 billion.

If this isn’t entirely free money, it’s extremely close to free money.

So in ten years, the Federal Reserve owns $10 trillion more in federal bonds (assuming the bonds are long-term and didn’t mature).

It's no wonder that some economist propose... » Read more

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The Ka-POOM! Survival Guide

How to end up on the winning side of the Wealth Transfer
Saturday, March 11, 2017, 1:02 AM

Executive Summary

  • Understanding the details of the Ka-POOM! theory
  • The end game: hyperinflation
  • Transitioning to tangible (vs paper) assets
  • The critical importance of timing as things switch from deflation to runaway inflation

If you have not yet read Part 1: When This All Blows Up,  available free to all readers, please click here to read it first.

Ka-POOM!

Now it’s time to revisit the Ka-POOM theory which posits that bubbles will be blown, then they will deflate (or threaten to, more precisely), and that will then be met with more money printing.  Our view is that this cycle will continue until the entire system is utterly ruined, the underlying currencies destroyed.

What the 2008 financial crisis made clear is that when natural market forces work to purge the oversupply of poor-quality debt from the system. The bad mortgages (think subprime), the bad sovereign debts (think Greece), and the loan portfolios of over-extended financial institutions (think Citibank) represented ‘poor quality debt.’  When the market (finally) figured out that those debts would never be repaid at face value, or perhaps at all, turmoil erupted.

During times like these a vicious sequence begins: the market demands higher interest rates for the increased risks it sees. This makes debts harder to service, ultimately triggering defaults, which only compounds the difficulties as interest costs and defaults spiral ever upwards until the system is purged.  Think of it as nature’s way of removing bad credit from the world, the way a lion chases the lamest antelope first.

Because in our fiat currency system ‘all money is loaned into existence’ (see chapters 7 and 8 of The Crash Course on-line video series), during periods of high debt default, the money supply shrinks. Money is created when a loan is made and, conversely, money disappears when a debt defaults (or is paid back). This is the textbook definition of deflation—a common symptom of which is falling prices the cause of which is that there’s just less money (and/or credit) available to chase goods and services.

As a reminder, money is a claim on real wealth and debt is a claim on future money.  All that happens when we borrow more and more is that we push our problems of paying for what we want out into the future.  Which means that... » Read more

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When This All Blows Up...

Understanding the how & when of the next economic crash
Saturday, March 11, 2017, 1:01 AM

This report marks the end of a series of three big trains of thought. The first explained how we’re living through the Mother Of All Financial Bubbles. The next detailed the Great Wealth Transfer that is now underway, siphoning our wealth into the pockets of an elite few.

This concluding report predicts how these deleterious and unsustainable trends will inevitably ‘resolve’ (which is a pleasant way of saying ‘blow up’.) » Read more

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2016 Year In Review

A Clockwork Orange
Thursday, December 22, 2016, 9:03 PM

Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It's quite longer than our usual posts, but worth the time to read in full. » Read more

Insider

Off The Cuff: Repercussions Of Rising Rates

Rising interest rates are the big story right now
Thursday, December 1, 2016, 9:54 PM

In this week's Off The Cuff podcast, Chris and Mish Shedlock discuss:

  • A Bottom For Miners?
    • Mish thinks this may be a good purchasing window
  • Hit To Housing
    • Rising interest rates are kryptonite to home prices
  • Vanishing Jobs
    • Trump can't replace the jobs lost to automation
  • The Year Of The Iconoclast
    • Anti-establishment platforms gather steam around the world

After years and years of declining/0% interest rates, the trend may be reversing. Market interest rates have risen faster over the past month than in decades.

Chris and Mish see this as having implications that will ripple through all asset classes. As Mish warns:

I’m watching interest rates just rise and rise. And the thing here is everyone’s betting on this massive inflationary scenario under Trump. I’m not sure I get it. Now, long term, we can all look at this and say, “Yeah, he’s going to take less money in in taxes, he’s going to waste more on infrastructure, he wants to increase military spending.” Of those, the only one I agree with is lowering taxes but the analysis is negative, negative, negative from Congressional CBO and all the people who figure this stuff out.

So we’ve got this surge in interest rates and money pouring into the dollar. The dollar’s going higher. I look at all of this and I think, “Hmm, a surge in interest rates. Ah, it’s likely to affect an ugly market.” The rising US dollar impacts exports in a negative fashion. The stock market is incredibly overvalued. And we know what generally happens when interest rates rise: I’m looking at a potential deflationary bust. Especially when we factor in Trump’s trade policies that might very well cause a global trade war.

Click to listen to a sample of this Off the Cuff Podcast or Enroll today to access the full audio and other premium content today. » Read more

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Hell To Pay

The final condition for a market crash is falling into place
Friday, September 23, 2016, 5:23 PM

Those familiar with my writing know I put the word “markets” in quotes because we no longer have a financial system where legitimate price discovery is a regular -- or even recognizable -- feature.

It's destined to fail. What more can be said about such a flawed system?

Well, a lot as it turns out. 

And failure to pay attention at this stage of economic and ecological history will prove to be exceptionally painful. » Read more

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Prepare For The Global Deflationary Deluge

The 2008 crisis was just a warm-up
Friday, September 23, 2016, 5:23 PM

Executive Summary

  • Why the debt market is the powder keg that will blow things sky-high
  • The most dangerous asset bubbles to watch and avoid
  • The implications of a collapse in the bond market
  • Where will money then go?

If you have not yet read Part 1: Hell To Pay available free to all readers, please click here to read it first.

Economic Deformations

The big problem with central bank policies, besides driving the largest wealth and income gaps in all of recorded history, is that they’ve massively deformed the financial and economic landscape. 

Too-cheap money has distorted just about everything, and has badly warped corporate incentives. There’s literally no place one can look and not find an economic or financial distortion.  “Gains” (such as they are) have gone to holders of financial assets, and corporations have opted to buy back their own shares and to not re-invest in property, plant, equipment or people. 

All of this will work right up until the day it doesn’t. And then we'll experience a financial and economic crisis likely to be the largest we ever live through.

And these distortions are not only everywhere, but they are all at record levels.  As in never higher in human history. 

Just looking at the corporate data alone ought to scare the pants of off every investor on the planet. As the chart below makes clear... » Read more

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And.....It's Gone!

Market value everywhere is vaporizing fast
Wednesday, January 20, 2016, 12:00 PM

The deflation monster was evident across the global markets today, and the possibility of a market crash remains as high as ever.

In the overnight session on Tuesday, everything fell apart.

We can now clearly see the tracks of the deflation monster stomping across the world stage. While a retreat into bonds (safety) has happened, that’s just the normal first reaction to such a terrible financial situation.  However, those bonds will prove to be roach motels as the next stage of this monster will be massive bond defaults of all varieties. » Read more

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Why This Next Crisis Will Be Worse Than 2008

And what you can do to prepare
Friday, January 15, 2016, 8:53 PM

Executive Summary

  • There are too many signs of deflation to deny it's winning the day
  • Why China's weakening will accelerate the global economy's decent
  • Why this next crisis will be worse than 2008
  • What will it look like if things really get out of control (how bad could things get?)
  • The best investments to be making now, before the rout

If you have not yet read The Deflation Monster Has Arrived, available free to all readers, please click here to read it first.

Too Many Warning Signs To Talk About

The deflationary monster is here and there are almost too many warning signs to list, let alone fully describe.

So I’ll just list and link them…you can follow up on the details if you want, it’s the ‘general vibe’ I want to get across.

Here are the signs of a weak economy that we are dealing with:

The pattern here is one of rapidly slowing economic activity and mounting pain starting “from the outside in” as emerging markets and the poor people within the core countries bear the brunt at first. Things always get rolling to the downside starting with the weakest, peripheral elements first.

Copper and oil are providing very clear signs that economic activity is not just slow, but in rapid retreat. Wal-Mart tells us that its shoppers are having trouble. The fresh all-time lows in a variety of currencies, plus massive weakness in others, is telling us that the virtuous portion of the liquidity cycle that the Fed, et al., unleashed on the world has entered the vicious part of the cycle.

The pain will spread to the center with increasing speed. The main question is if the authorities can stop that before the momentum becomes too great to halt? And what will happen if they cannot?

The answer to that is... » Read more

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Markets Are Correcting Hard

An assessment of the risks of things getting worse from here
Friday, January 8, 2016, 1:41 AM

The long-awaited global financial market correction has arrived. We are seeing collapses in all major markets and across all major categories.

As usual, the pain has started at the edges, in the weaker elements (emerging markets, junk bonds, weak companies, etc.) and is rapidly spreading towards the center. » Read more